IRA Withdrawl question

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IRA Withdrawl question

Post by Mode32 »

My mom is 69, has a well funded 401k from a previous employer and is working part-time (no 401K) currently which she plans to continue for 2-3 more years. She does not have an IRA, and is thinking about opening one.

1. If she opens a traditional IRA, will she be subject to the required RMD’s from this traditional IRA in 3 years (when she is 72 years old), or is the required RMD’s calculated based on a percent (or factor) of all the traditional retirement accounts a person holds?

2. So my mom’s 401K (all traditional) is much larger than the traditional IRA she will be starting today, and would the required RMD percent/amount only need to come from the 401K so the much smaller traditional IRA can have more time to grow?

Thanks for your time.

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Re: IRA Withdrawl question

Post by delamer »

Why does it matter if the IRA has more time to grow? Are the investments in the 401(k) limited?

The answer, regardless, is no — she can only take the 401(k) RMD from the 401(k) and she can only take the IRA RMD from the IRA.

She could open a Roth and avoid the RMD issue. Or she could rollover the 401(k) into an IRA, and then take the total RMD for the IRAs (combined) from either account.
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Re: IRA Withdrawl question

Post by lakpr »

As mentioned by @delamer, the 401k RMD and the IRA RMD are separate, and both must be taken once the participant (your mom) reaches the age of 72.

I would suggest at this age, if she is looking to put some money into an IRA, let that be Roth IRA. No RMDs from Roth IRA. I'd let the 401k money be in within the 401k plan (assuming that the choices are decent, expense ratios are comparable to retail or better) for the freebie creditor protections.

If the plan allows Roth conversions within the plan, I'd also do that up to the top of the 12% bracket at the barest minimum, and possibly up to the top of 22% bracket too. The current 12% and 22% tax brackets will disappear by 2025, so Roth conversions now can help lessen future RMDs.
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Re: IRA Withdrawl question

Post by jimkinny »

After she retires consider rolling over the 401 into a self managed TIRA.

The advantage of a Roth IRA is that after one pays tax on the income it will not be taxed in the future unless Congress changes the law. But, you pay taxes on the amount going into the Roth.

I think I would put future retirement money into a regular 401 and take advantage of earning returns on what otherwise would go to the IRS. Then after retirement, I would roll the 401 into the IRA already established.

RMDs do not have to be paid individually for each account separately. I believe the IRS indicates that the RMD has to be calculated for each account.

After retirement it might be advantageous to consider establishing a Roth IRA. Your mother may be in a lower tax bracket after she retires and then could consider converting some of the TIRA into a Roth at a lower tax rate than when she is working. Taxes would be due on the amount converted but it may be at a lower marginal tax rate than when she was working. You don't have to convert all of the IRA, just whatever you want to convert. Make sure not to convert so much that she is again in a higher tax bracket.
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Re: IRA Withdrawl question

Post by FiveK »

See RMD Comparison Chart (IRAs vs. Defined Contribution Plans) | Internal Revenue Service for "How should I take my RMDs if I have multiple accounts?" and related items.

To evaluate whether the use of traditional or Roth contributions now is likely better, the future marginal tax rate (i.e., after retirement) should be estimated.
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Re: IRA Withdrawl question

Post by Eagle33 »

If she is charitable minded, she may want to consider rollover 401k to traditional IRA and contribute to a Roth IRA. She can give QCDs that will reduce the taxable RMD from the traditional IRA. Her contributions to the Roth IRA will have no negative affect on the QCDs. QCDs only available from traditional IRA, not a 401k account.
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Re: IRA Withdrawl question

Post by water2357 »

Assuming your mother is on Medicare since she is working part time, if you do Roth conversions and increase her current income, be aware that this may trigger IRMAA (income related monthly adjustment amount). It increases the Medicare premiums and in effect increases the marginal federal income tax rates.
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